Detroit’s bankruptcy impacts municipal bond investors

Municipal bonds have been a favorite investment choice for individuals in the higher tax brackets forever. In addition to providing their investors with a source of tax-free income, for the most part, this segment of the fixed-income securities world hasn’t experienced a lot of defaults. But they aren’t —and never have been— a risk-free choice, as anyone holding bonds in bankrupt Detroit now know.

First, some good news: According a SeeekingAlpha.com piece written by Joseph Rosenblum and Neene Jenkins in June, Detroit has about $8 billion in outstanding municipal bonds. Of that, $5.4 billion are said to be revenue bonds issued by water and sewage systems and—here’s the good news—that means interest and principal payments for them is secured by revenues. So those bondholders don’t have to worry—they’ll be paid.

On the other hand, bondholders of the following will face other outcomes. The include: General obligation bonds ($368 million) backed by an unlimited tax pledge; general obligation bonds ($479 million) backed by state aid; general obligation bonds ($161 million) backed by a limited tax pledge; and pension obligation certificates ($1.5 billion) backed mostly by general fund payments.

Given that Detroit’s filing for bankruptcy is the largest municipal bankruptcy in American history, the impact on muni bond holders has been dramatic for those holding individual bonds as well as shareholders of municipal bond funds. The ICI reported that in July, $ 9.7 billion was pulled out of muni bond funds.

If you’re a muni-bond fund holder and worried about the exposure your fund may have had to Detroit-related bonds, here’s a listing of the 10 municipal bond funds with the most exposure, according to an August 12th WeatlhManagement.com story. When reading through it keep in mind a fund’s portfolio holdings change and thus aren’t reported up-to-the-minute. So contact your fund for more details.

The Top 10 list along with the percentage exposure Detroit bonds have had to the fund’s total market value: